Taking the leap on the Consumer Duty

Speaker: Sheldon Mills, executive director of consumers and competition 
Event:  Consumer Duty: 1 year on[1]  
Delivered: 31 July 2024 
Note: This is a drafted speech and may differ from the delivered version 

Highlights 

• We welcome the improvements firms have made to deliver better consumer outcomes in the first year of the Duty. 
• The outcomes-based nature of the Duty will allow us to streamline our rulebook to support competitiveness and growth, while ensuring good consumer outcomes. 
• Following today’s milestone, we’ll continue to focus on how firms are embedding the Duty, acting to address harm. 

Returning to the lilypond  

In February last year, I urged you all to eat the frog.  

And no, I was not casting for an alternative career as a chef – something which anyone who has eaten my cooking would be grateful for. I was encouraging you all to tackle implementing the Consumer Duty[2], even if it was the one thing you most wanted to avoid.  

I am very pleased to say that in the intervening 18 months, we have seen a (hypothetical, I must add!) feast of frogs. 

We introduced the Consumer Duty and its outcomes-based approach as we want to create an environment for healthy competition and innovation based on high standards. It is a core part of the FCA’s strategy and gives effect to the cross-party mandate we were given by Parliament through the Financial Services Act 2021. We see the Duty as good for consumers, good for firms, and good for growth in the economy. 

I want to take this opportunity today to celebrate how far we’ve come already to meet those goals. And, to talk about what comes next.  

But before I do so, I wish to return to the lilypond, and to frogs. One of the fascinating things about frogs is that not only can they jump, but they can leap. The striped rocket frog, despite being only 5cm tall, can leap over 2 metres – making it one of the most proficient jumpers relative to its size for any animal.  

Today, we are all making a leap of our own. And I do not mean I am expecting a last-minute call-up for the Team GB Olympic long-jump squad. Having reached the deadline for closed products and services, the Consumer Duty is in force across all of retail financial services.  

If a humble frog, powered by nothing more than insects, can jump 20 times its own height, then the UK’s financial services industry, powered by an incredible 2.5 million people across our country, and even the odd consultant, can take the leap to the heights of full implementation of the Consumer Duty.  

Impact of the Duty to date 

I would like to thank every firm – and everyone within those firms who has played their part – for the steps you have taken to implement the Duty so far. 

We know many of you have embraced the Duty and used it as a driver to shift your culture and improve outcomes.  

Over the past year, we’ve seen many examples of positive and impactful changes. We’ve shared much of this great practice so others can learn from it. And we’ve also said where firms need to do more. 

In our cash savings work, following our market review[3], we’ve seen firms act more quickly to increase rates following base rate increases. The base rate rose by 0.25ppt between July 2023 and February 2024. During this time, firms, on average, increased rates for easy access deposits by 0.45ppt. We estimate consumers will get around an additional £4bn in interest payments per year, money they can save or reinvest, use to pay down any debt, or that might boost spending in the wider economy.  

Our intervention on GAP products[4] - where we asked firms to look at their commission structure – will, we anticipate, see firms make changes to improve the value of GAP insurance which, based on assumptions about the expected changes, will save their customers around £70m.  

In response to the Duty, a large financial advice firm is making significant changes to its business model to simplify and unbundle its charging structure, resulting in improved outcomes for clients with greater transparency and comparability with other firms and the removal of an early withdrawal charge for certain products. 

And following our work on the treatment of interest on cash balances by platform investment providers[5], the vast majority of firms written to as part of the sample have stopped ‘double dipping’ - that’s making a return on interest retention as well as charging customers for custody of cash. Aggregating the impact across 13 of those firms that have stopped this practice, we estimate this will put around £10m annually in fees back in customers’ pockets.  

So the Duty is already having a tangible impact on consumer outcomes. And it has been driving improvements in firm culture, conduct and governance, too, which over time will drive better outcomes still.  

Firms we’ve spoken to have developed new data and metrics to better understand their customers, for example to track customers who fall outside of their target market, allowing them to conduct outreach or implement intervention measures. 

Others still have improved the way they capture and record information about customer vulnerabilities and expand support to better meet customer needs by adopting a ‘tell us once’ approach.  

Some firms have changed their employee bonus structures to make sure that incentives are right, and employees only get good outcomes when their customers do.  

We are also seeing firms being more proactive with their communications, contacting customers to provide information on what better products may be available, and monitoring the impact so they can learn and improve. And many are rewriting those communications to make them simpler and easy to understand. 

This is just the beginning of the journey not the end. And it’s clear that there are a number of areas where firms need to continue to make improvements. So, we know there is much more to come.  

Supporting innovation and competitiveness  

A question industry, investors and commentators often ask me is whether the Consumer Duty protects consumers too much at the expense of growth, innovation, investor appetite in the UK economy.  Or in other words, is our frog preventing other wildlife from swimming in the lilypond? 

My answer is that the lilypond does not have to choose one species over another. Consumer protection and growth are not mutually exclusive. They can and should be mutually reinforcing. We want to see inclusive, sustainable growth, where consumers have appropriate access to products and services that meet their needs. 

In delivering that, we face many changes and challenges, and we must remain flexible and adaptive to meet them.  

The world is changing and we’re seeing shifts in consumers’ banking and payment needs. As just one example, our Financial Lives Survey (FLS)[6] found that the 47% of consumers used a digital wallet for payments in 2022, compared to just 17% 5 years earlier.  

Technological advancements have opened up opportunities for firms to innovate and provide products to respond. But this shouldn’t be at the expense of wider inclusion. Last week we published rules[7] which will help support the 3 million people who still rely strongly on cash and the millions of small businesses who need to deposit cash. Balancing innovation with consumer protection while supporting the need to grow the economy is a crucial focus under our objectives. 

For example, AI presents opportunities for firms who are thinking creatively about opportunities for innovation and efficiencies.  

That’s why we have been working with other regulators in the Digital Regulation Cooperation Forum (DRCF)[8] to run an AI and Digital Hub where tech innovators can get free and informal advice. We’ll also be launching an AI Sandbox in due course too. Our aim is to enable product developers to bring their products to market safely and quickly.  

The Consumer Duty is deliberately flexible to adapt to changes as an outcomes-based measure. It allows space for firms to innovate and find new ways of serving their customers as the world around us changes, all the while being clear on our expectations for good consumer outcomes.   

Since last year, we have a new secondary objective[9] to facilitate the international competitiveness of the UK economy and its growth in the medium to long term. Our approach to the Duty will support this objective by promoting more effective competition and innovation. 

This is not new to us.  At the FCA, we want to see growth. This week, we published our first SICGO Report (PDF)[10], demonstrating how our work supports sustainable long-term economic growth. We have been international leaders to support innovation in financial services. We were the first regulator in the world to promote innovation in financial services through our Innovation Sandboxes and pathways. And we created a space for start-ups and FinTechs to test new ideas and products with our support. We have supported around 900 firms to date.   

Last year we made our Digital Sandbox[11] permanent after a successful pilot. Nearly 60% of participants took off in a better shape including launching new products, securing funding and partnerships, or receiving industry awards or recognition. Through our Early and High Growth Oversight[12] approach, we have supported more than 450 newly authorised firms to understand their obligations and meet the standards we expect of them.  

It goes without saying that there will be risks with innovation and changes. We need to balance these and recognise that the Duty cannot - and should not - eliminate all risk to consumers from financial services. Last year, I spoke about how we will balance[13] not only the risks of consumer harm, but also the risks of underinvestment and slow growth. We want to empower consumers, armed with the right information, to make the right decisions for their own risk appetites.

We want our rules, including the Duty, to enable firms to better support people who can save and invest. This is the basis for our continuing work on the Advice Guidance Boundary Review. We know from our FLS that in 2022 there were at least 4.5 million UK consumers with investible assets of £10,000 or more held mostly or entirely in cash, despite having no plans to withdraw from their savings in the next 5 years. Furthermore, research by Scottish Widows (PDF)[14] has found that 38% of consumers are not saving enough to fund a minimum lifestyle in retirement. Changing this would not only benefit investment, and growth, but consumers too.

In embracing the new, and ensuring our regulation is responsive and flexible, we know some stakeholders have concerns about the implications for redress and the approach other authorities will take on complaints.

The Consumer Duty is one of the issues being managed through the Wider Implications Framework[15]. The framework provides a structure for its members to work together to find the best way to deal with issues that could have wider implications across the financial services industry. 

We continue to work closely with the Financial Ombudsman[16] to ensure alignment and consistency in how the Duty is interpreted. I’m delighted Abby Thomas is joining us today, who will shortly be able to give the Financial Ombudsman’s perspective.

We have been, and will continue to be, proportionate in our approach to supervising the Duty. And we will continue to work with firms to get the Duty right in response to practices we are seeing. This is particularly so for smaller firms. I have talked about innovation as a clear factor in growth, and the same goes for a thriving small business sector. We want smaller firms to feel confident in their application of the Duty and to deliver good outcomes for their customers. At the same time, we want to support firms that do the right thing to innovate, flourish and grow. 

The Duty allows for smaller firms – and I understand there are over 1,000 of you dialing in today which is fantastic – to take an approach that fits their size, the activities they undertake, the market they operate in and, of course, to the needs and circumstances of their customers. 

But we know the Duty has been added onto our already comprehensive Handbook. Firms of all sizes, but particularly smaller firms, often raise with me their concerns about the length and complexity of our rules. There is a perception that this complexity can be a bar on innovation and growth.  

And that is one of the reasons why we published on Monday this week our Call for Input[17] - to explore how we can simplify the requirements on firms dealing with retail customers. And it’s the introduction of the Duty and its outcomes focused approach that gives us the opportunity to take stock.  

We want to address areas of complexity, duplication, or over-prescription which create regulatory costs with limited consumer benefit. And we want to provide flexibility and for our rules to be responsive to future changes and innovation.  

I encourage you to read our Call for Input and engage with us – we want your views to ensure we can maximize the benefits of the Duty.  

What comes next? 

As we have opened the Call for Input, and as we move past today’s milestone, we’re firmly focussed on what comes next.  

In the coming weeks, we will publish a grid of our forward programme of Consumer Duty work. In this programme, we have prioritised initiatives where: 

• First, there is a need to act to address harm, or potential harm, to retail customers.  
• Second, we want greater understanding of how you’re embedding the Duty, the outcomes your customers are getting, and where potential issues are emerging. Where we need more data and information from firms, we’ll only ask for what we really need.  
• And third, we believe sharing more information on good practice and our expectations will benefit industry and help drive better outcomes. 

Under this work programme, we’ll do thematic work across sectors, work on specific sectors, products or services, and we’ll keep our focus on the price and value outcome. 

We’re focused on price and value as we know this is an area firms have found challenging.  

Our role is not to set prices. But rather to ensure that firms are robustly assessing whether they are offering fair value to their customers, and ensure firms take appropriate action where their assessments indicate that their products and services may not offer fair value.  

Many of the harms of poor value are exacerbated by firms’ lack of compliance with consumer understanding or customer support requirements, for example by using complex product terms and conditions, or opaque fees. Ultimately, we are seeking to ensure that value overall is provided - price is one element, but service and understanding are also key components. We will be taking a holistic approach to the application of the Consumer Duty.  

We will not stand in the way of a well-run business making profit in a well-functioning market, where there is effective competition that is in the interests of consumers. Profits drive innovation and better consumer services. What is important is that these profits are not at the expense of consumers receiving fair value. The price a customer pays must be reasonable compared to the overall benefits they receive. 

Taking the leap  

In Egypt, statues, amulets and whole temples from throughout the history of the Ancient period have been found depicting and deifying frogs. It is thought that the annual flooding of the Nile, which underpinned Ancient Egypt’s agriculture, brought with it an explosion of the population of frogs, making them an important symbol of new life and resurrection. 

UK financial services are not in need of a resurrection. We are rightfully proud to have one of the most dynamic, capable, and innovative financial services industries in the world.  

But today does mark something of a new start.  

A year ago, the Duty came into force for open products and services.  

Today it comes into force for closed products and services.

You’ve heard this from us before, but the Consumer Duty was never going to be a once and done act. It is an ongoing journey for improvement that we’re on together.

We’re committed to ensuring the benefits of the Duty are realised for consumers, firms, and the whole economy.

It is about reputation, it is about trust, and it is about delivering value and growth.

But we know we have more to do. This is not the beginning of the end for all of our efforts to implement the Consumer Duty, but the end of the beginning.

Today, we are taking the leap. But, like the frog, we have many smaller hops to come.